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Why ECB's quantitative easing won't work and how it can be fixed

Last week, investors were expecting Mario Draghi to pull a rabbit out of his hat. But could it be that there is no rabbit at all? I believe the extension of the ECB’s quantitative easing programme will have limited impact on the eurozone’s real economy.

Against the ECB’s bazooka lies a solid wall of obstacles. The first is an impaired banking system, muddling through €1tn of bad loans with balance sheets still three times as large as the eurozone economy. The second problem is a lack of corporate investment, which remains insensitive to lower interest rates. The third is shallow capital markets, a bottleneck against ECB liquidity trickling down to small and medium businesses, responsible for 80 per cent of job creation.

This means monetary stimulus is necessary but not sufficient, as Mr Draghi himself said earlier this year.To be fair, QE has had some success so far. It has lowered the euro and supported exports, both in Germany and the periphery. But currency depreciation is temporary and dependent on the reactions by other central banks. You can win a battle, but winning the currency war is a different story.

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